Disability Insurance: Frequently Asked Questions

Most people do not anticipate becoming incapacitated due to an injury or illness, but such a tragedy is much more common than many people realize.

Disability insurance is one way individuals can get the financial help they need if they do become unable to work due to a disability.

If you are considering purchasing disability insurance, it is important to know the facts. Below are answers to some of the most common questions about disability insurance.

1. How many people suffer from work-impacting disabilities?

According to the Health Insurance Association of America, about 30 percent of Americans between the ages of 35 and 65 will suffer from a disability lasting 90 days or longer at some point in their careers. Among these individuals, about 14 percent will be disabled for more than five years.

2. How much coverage does a typical employer-sponsored disability plan provide?

Typically, an employer-sponsored disability insurance plan will cover only 45 percent to 60 percent of a person's salary.

3. What is supplemental disability insurance?

Supplemental disability insurance is coverage a person can purchase to augment his or her employer-sponsored plan. A supplemental disability insurance plan could add 10 percent to 20 percent in additional coverage.

4. What types of disability insurance contracts are available?

The disability insurance contracts available include:

• Non-Cancelable Contracts: These contracts lock in a policyholder's rates and benefits throughout the life of the policy.
• Guaranteed Renewable Contracts: These contracts guarantee that the insurer will not drop the policyholder. However, the insurer can increase the policy's rates.
• Conditionally Renewable Contract: These contracts allow the insurer to add conditions to the policy and to raise the rates at any time.

5. How does disability insurance define a coverable disability?

There are two ways in which disability insurance defines a coverable disability:

• Own-Occupation Disability: This definition covers any disability that prevents the policyholder from performing the duties required of his or her own job.
• Any-Occupation Disability: This definition covers any disability that prevents the policyholder form performing the duties required of any type of job.

6. What is the policy elimination period?

The policy elimination period is the period of time between the onset of a policyholder's disability and when benefit payments begin.

7. What are two important disability insurance riders that one should consider when purchasing disability insurance?

Individuals purchasing disability insurance should consider adding two riders to their policies: a "cost of living adjustment," which takes into account inflation when determining benefits, and a "future purchase option," which allows policyholders to purchase additional coverage as their salaries increase over time.

8. What is the potential financial impact related to the inability to work due to a disability?

According to the May 2000, Norton Bankruptcy Advisor, more than 326,000 families who had filed for bankruptcy protection in 1999 identified the primary reason for the bankruptcy to be an illness or injury in their family.

Additionally, it is estimated that 48 percent of mortgage foreclosures are due to a work-impacting disability, according to the U.S. Housing and Home Finance Agency.

9. What are the most common impairments resulting in disability insurance claims?

The top five disabilities that result in disability insurance claims are:

• Back impairments (18.1 percent);
• Emotional or psychiatric impairments (12.7 percent);
• Neurological impairments (11.3 percent);
• Impairments related to the extremities (9.0 percent); and
• Cardiovascular impairments (4.1 percent).

10. How do you determine how much disability insurance coverage you need?

To determine how much disability insurance coverage you need, you first need to add up all of your fixed monthly expenses. Then, determine your total household income, assuming that you are unable to work. The difference between these two numbers is how much disability insurance coverage you will need.